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The primary challenge of running any business is to keep consistent cash flow running. Some markets are more vulnerable than others to cash flows problems. It’s a common dilemma for small and mid-sized companies. These companies usually find themselves lacking enough working capital to fill a second large order, especially after fulfilling the first one and awaiting payment.

Single Client AR Factoring

Client Concentration and Funding

Even more problematic is companies that rely on one or two large clients for their revenues have limitations in their cash flow solutions. Often, they struggle to balance their accounts receivable with on-time customer payment successfully. In this specific context, getting a bank loan is very critical. Bankers or lenders are less likely to approve the funding as a consequence of the lack of a diverse client base. Therefore, client concentration or single client invoice factoring can be a vital solution when dealing with this kind of cash flows problems.

What is invoice factoring, and how does it work?

Invoice factoring also referred to as accounts receivable factoring or AR factoring is a transaction in which a business uses its outstanding invoices as collateral in a financing agreement. This agreement is with a third-party financial company known as a factoring company. Companies do this to free up the capital that is stuck in unpaid debts. Thus, instead of waiting 30 to 90 days to receive payment, companies can choose to sell their invoices to a factor who will provide them with an upfront payment. The upfront payment is usually an equal amount of reduced value of the unpaid accounts receivable). This way, companies can quickly build up enough cash flow to handle new orders and the day to day activities.

For example, if a Wine and Spirits company is looking for a funding solution and hold creditworthy invoices worth $150.000, they can choose to factor them and get same day funding. The factor can offer to provide up to 90% upfront payment of their value, meaning $135.000. In due time, the factor will collect the money from the liable customers according to the initial terms of the invoices and return the remaining $15.000 minus the agreed service fees.

Invoice factoring can be an excellent solution for any business ineligible for a bank loan, or that has already consumed its credit line. It is an even better solution for companies that depend on a single client only to generate revenues. These companies have unique needs because of their critical situation. They usually have less funding options and more pressure to fulfill orders. Hopefully, AR funding can quickly and efficiently provide working capital to businesses. Even to those that have a single client or client concentration. This is through credit protection and AR management.

Here is how invoice factoring works:

  • Your company submits a single invoice to the factor
  • The factor verifies the invoice and gets you simple credit qualifications
  • You receive an advance, up to 90% of the invoice value
  • Approval can be in as little as 24 hours as your credit score isn’t considered
  • No payment of upfront fees and enjoy a fast application process
  • Your business adds no additional debt

What is cash in advance loan?

When your business decides to factor its outstanding invoices, the factoring company advances to you up to 92% of the value of the invoice in as little as 24 hours. You will receive the remaining balance once your customer has paid minus a low-cost fee. The advance cash rate depends on the industry and the factor with whom you choose to work with. Also, your customer’s credit history, among other criteria, help define the advanced rate you will receive. If your company averages $100.000 monthly in accounts receivables, but your customers don’t pay until after 30 days, factoring can ensure you receive the cash against those invoices so that your business can hold a part of that amount, 90.000 if the rate is 90%, earlier than the supposed time.

How to choose the factor that best fits your business’ needs?

Once you have decided to opt for AR factoring as a funding solution, choose between traditional or new-age factoring company. The choice may seem a little complicated but will be more apparent once you dive into it. The different long-term contracts can get very confusing.  You deal with several vague terms like funding rates, various fees, and minimum monthly funding amounts. Therefore, you can look into these criteria to make the most optimal decision:

  1. Transparency in Rates and Fees 

    If your factor shows transparency in its rates and fees, they are most likely to be the right one to work with. Invoice factoring companies will often have different fees that can be broken down as follows:

      • Underwriting Fee – Usually meant to cover the actual expenses in closing your deal, i.e., background check and UCC filing/ release.
      • Discount Fee – A one-time percentage fee of the total purchased invoices.
      • Early Termination Fee – If you decide to terminate your contract earlier than agreed, you will likely be charged a flat fee beyond the buyout.
      • Misdirected Payment Fee – If your customers pay you instead of the factor, you will be charged a percentage of the invoice value that has been received by you.
      • Your factor should also bring to your attention their method of charging their rates. Some factors would pro-rate the factoring fees in the first funding month. However, some would charge you a full month’s worth.

    Any factoring agreement would bring along with several fees. The most important is finding a factor that will be open and honest from the outset about their service charges.

  2. Flexible Terms

    Getting a factoring contract on the right terms is very crucial for your business. You need to understand your long-term needs before making a decision. Your business could be cash flow sufficient after 12 months, so why get yourself into a long-term contract? Therefore, it is safer to go for a term that is 6 to 12 months and renew it whenever needed. Your business needs to have a scapegoat as well; in case you have to negotiate any early termination fees.

  3. Industry Expertise

    To decide which factoring company works best for you, you need to find one that is familiar and has direct expertise in your field. The factor needs to understand your needs to provide you with the right continuous service. Industry experience is the main criterion, and your factor should provide you with a proven track record of success.

  4. Customer Service

    Email and telephone check-ups are a must along with potential face to face meetings when required. Factors need to understand you and your customers to be reflective of your business and provide the best possible customer service and care.

What are the benefits of a single client factoring?

Managing cash flow can be a hustle when you are a concentrated client business. Factoring can provide you with many benefits stated as follows:

  • Based on your customer creditworthiness, not your credit;
  • Can be customized to fit your working capital needs;
  • Provides free back-office support;
  • Factoring is not a loan, a meaningless debt on your balance sheet;
  • Funding amount can grow as your receivables grow.

Ready to get funding despite client concentration? Call (888) 400-5930 or use the fast, safe & secure online funding application.

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